Credit-Fueled U.S. Car Sales May Need Help From Incomes

Auto loans were up 5.5 percent in the second quarter from the same time last year, with riskier buyers accounting for 43.9 percent of the total, up from 42 percent in 2008, according to Experian Plc. Photographer: Victor J. Blue/Bloomberg

Nov. 13 (Bloomberg) -- A rebound in U.S. auto sales has
been buoyed by the return of easy lending, even to borrowers
with flawed credit histories. Some economists question whether
the gains can be sustained without a boost in hiring.

Auto loans were up 5.5 percent in the second quarter from
the same time last year, with riskier buyers accounting for 43.9
percent of the total, up from 42 percent in 2008, according to
Experian Plc. By contrast, hourly wages for non-managers climbed
1.1 percent on average over the past 12 months, the least since
records began in 1965, Labor Department figures show.

The financing spigot opened as Federal Reserve efforts to
keep interest rates low prompted investors to pour money into
securities backed by subprime car loans in search of higher
returns, giving the auto industry and the economic expansion a
lift. That may no longer be enough to fuel purchases as wages
are held back by a pool of 12.3 million unemployed Americans.

“If you want to take it to another level of sales, you
want to see more of the fundamental drivers of consumption
improve more materially, things like income and employment,”
said Jacob Oubina, senior U.S. economist at RBC Capital Markets
LLC in New York, the bank with the third-best forecasts for
consumer spending, according to Bloomberg calculations. “With
credit flowing again to subprime, you’ve had the wherewithal to
bridge that gap to execute on pent-up demand. That takes you
only so far.”

Stocks fell, paced by a slump in financial and technology
shares, as investors watched for progress on Washington’s budget
debate. The Standard & Poor’s 500 Index dropped 0.4 percent to
1,374.53 at the close in New York.

German Confidence

Internationally, German investor confidence unexpectedly
declined in November as the sovereign debt crisis curbs growth
in Europe’s largest economy.

While pent-up demand, aging automobiles, and low borrowing
rates are boosting U.S. auto sales, support for the market also
is coming from an abundance of easy money as global investors,
similar to mortgage-bond speculators before them, search for
yield.

Issuance of auto-loan securities is up almost 60 percent so
far this year from a year ago, to $61 billion, making car loans
the biggest class in the $200 billion asset-backed securities
market, said Harris Trifon, a debt analyst at Deutsche Bank AG
in New York. Offerings of subprime auto debt are up 50.9 percent
from the same period in 2011, to $12.2 billion, he said.

On Wall Street, demand for auto debt is “extraordinary,”
said Trifon. “It’s opening up different financing channels to a
bigger universe of borrowers.”

Lower Scores

The average credit score of a new-car buyer has dropped to
753 this year from 762 in the second quarter of 2011, according
to Experian, a Dublin-based credit services company. For used
cars, average scores have fallen to 662 from 671.

By comparison, the median credit score nationally is 711,
according to Fair Isaac Corp., a Minneapolis company that
developed the rating system. Borrowers are ranked on a scale of
300 to 850, with those in the high range having a lower risk of
default. While definitions vary, borrowers with a history of
late or missed payments, little income or high levels of debt
have a lower rating and are those more likely to be considered
sub- or non-prime.

Global Lending Services LLC is staking at least $100
million on higher-risk car loans, working with dealers in
Georgia, South Carolina, North Carolina and Virginia. The
Atlanta-based company lends to subprime and deep-subprime
borrowers and, in some cases, buyers who have no credit history
at all.

Dealer sales are on pace to increase at least 10 percent in
2012 for the third consecutive year, the first such streak since
1973.

The string of double-digit gains may break next year. About
15 million new cars will be sold in 2013, a projected 4 percent
increase over expected 2012 sales, according to a September
forecast by Edmunds.com, a research group in Santa Monica,
California.

“There’s no question that credit is readily available at
great rates,” said Bill Fox, a partner in Fox Dealerships in
Auburn, New York, which has four lots close to Syracuse and a
fifth in Painted Post near Corning. “It’s certainly different
than it was a few years ago. It’s uniformly a good time to be in
the car business.”

Auto Contribution

The auto industry has accounted for 0.3 percentage point of
the average 2.2 percent gain in quarterly gross domestic product
since the recovery from the recession began in June 2009,
Commerce Department data show.

While credit availability is bolstering car sales now, it
might not be enough to maintain the momentum, said Ken Mayland,
president of ClearView Economics LLC in Pepper Pike, Ohio.

“We’re not getting the income generation to propel those
auto sales to the next, higher, level,” Mayland said. “With
how weak the economy is and how weak income generation is, we’re
really at a stumbling block.”

Employers added 171,000 workers to payrolls in October and
the unemployment rate rose to 7.9 percent from 7.8 percent the
prior month as hundreds of thousands of Americans joined the
labor force in search of a job, according to Labor Department
data.

The thawing of credit while wages stagnate is not
necessarily a good thing, said John Silvia, chief economist at
Wells Fargo Securities Inc. in Charlotte, North Carolina, who
drew comparisons to the mortgage-lending surge that was driven
by too-easy borrowing.

“Once this cycle gets going, we could be in deep trouble
in two or three years, because everybody starts pushing the
envelope and pushing the envelope,” said Silvia, a former chief
economist of the Senate Banking Committee. “Are we drifting
into the same problem we did with adjustable-rate mortgages in
2004?”